The Cost of Opposition to Resource Development

The Financial Post identified $129 BILLION of resource projects which are held up by:

• Environmentalists
• First Nations

What is the cost to the economy of these delays? In this blog I will try to quantify the cost of this to the Canadian economy (as measured by its GDP) over the next 20 years.

The two groups can be considered the “enemy” of ordinary Canadians. Note that the enemy are:

• “eco-warriors”, not the environment
• First Nations leadership, not indigenous people

The $129 billion price tag on these projects represents only the construction costs. When the projects are in operation, they will provide revenue for many years to come. This revenue will be:

• Taxed (thereby providing money to balance the budget(s) and enhance social programs
• Spent (boosting the economy further via the “velocity of money”)
• Invested (providing a future return to the investors and simultaneously boosting the GDP)

The total addition to Canada’s GDP over 20 years is $916 billion (“nominal” dollars – values include inflation).

If these projects are approved quickly and efficiently, it is likely that many other projects will be brought for approval. Assuming that $129 billion of projects are approved three years later, the total addition i to Canada’s GDP over 20 years is $1700 billion.

Of course, the development boom could be much greater than the number chosen here. Most resource companies have an inventory of possible developments which could be started when the conditions are right.

These developments will also have an impact on employment. Without the details of the projects, it is impossible to calculate the number of jobs which will be created, However, in the construction phase the number is likely to be in the 10,000’s and in the production phase maybe in the 1,000’s. Note that most of these jobs will be well paid professional and skilled jobs (unlike the current employment “boom” where most of the jobs are low-paid, part-time and seasonal).

In doing these calculations, I used real data, averaged over the last 7-8 years, assumptions about the timing of the projects, the time taken to get to first production, and the revenue stream as a percentage of the capital cost of the projects.

The data I used includes:

• Canada GDP 2017 is $1653 billion (Wikipedia: World Bank)
• Velocity of money is 066 (M2 Money supply from Stats Canada)
• Average growth rate (2010-2017) is 2.24%/year

(source: https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=CA)

• Average Inflation (2010-2017) is 1.65%/year

(source: https://www.inflation.eu/inflation-rates/canada/historic-inflation/cpi-inflation-canada.aspx)

 

The assumptions in the calculation are:

• $42 billion started in 2019, 2020, 2021
• Each project takes 3 years before production starts
• Annual revenues from each project are 20% of capital cost

The final assumption is probably the most difficult to make, without having the details of each project. I used Suncor’s Firebag SAGD oilsands project as a reasonableness check:

• Capital cost $1 billion (2002)
• Production 181,000 b/d (2017)
• Total Suncor oilsands production 505,000 b/d (2017)
• Total Suncor oilsands revenue $2.7 billion (2017)
• Firebag revenue by prorationing $0.968 billion (2017)

Thus Suncor’s revenue from Firebag is roughly 100% of the initial investment per year. This is after the crash of the oil price but does not include capital investment for new pads etc. Guessing that the total cumulative investment is up to $5 billion, then the revenue estimate of 20% of capital investment seems reasonable. Note that this is revenue, which is not the same as profit. This revenue goes into costs, taxes, profits, depreciation etc. However, all of it goes to contribute to GDP.

The limitations of this analysis are:

• No detailed data on individual projects
• Purchases imported (equipment, services etc.) will reduce GDP
• Profits remitted to foreign investors will reduce GDP
• Effect on Canadian oil prices not included (could be $15 billion/year!)